The budget carried mixed signals for the bond market.
The continuing fiscal surplus is regarded as a positive surprise. Many market participants were expecting a marked decline, leading to additional government borrowing requirements, says Citi economist Leon Myburgh.
Because less supply is needed, yields should adjust to reflect increased scarcity.
The budget estimates the surplus will be maintained this year at 1%, the same as last year. It's expected to decline gradually to 0,8% next year, 0,6% in 2009/2010 and 0,7% in 2010/2011.
However, debt funding of public-sector organisations such as Eskom and Transnet will rise sharply over this period. Their funding activities may have become more difficult and more expensive if government had increased its debt needs at the same time, says Leon Krynauw of brokers Barnard Jacobs Mellet.
This seemed to be received favourably in the market. Long-dated yields rose after the budget; shorter yields held steady.
Government's provision of R60bn in support of Eskom's investment programme is also seen as positive for the bond market, says Krynauw. Though details of this support for Eskom were not clear from the budget, the announcement does provide important reassurance for the market.
A potentially negative announcement for the local bond market is the reform of exchange controls. This will allow domestic pension funds and insurers to increase their foreign exposure from 15% to 20% of total retail assets.
For collective investment schemes and some other institutional investors, the limit is increased to 30%. The consequence could be a fall in demand for local fixed-interest instruments.
Taken together, the supply-side shortage from the deficit and the demand-side weakening from the easing of foreign- exchange controls may balance each other out.
But these are unlikely to do much to change the negative sentiment foreign investors have been showing towards SA in recent weeks, says Myburgh.
This is borne out by the latest Merrill Lynch survey of global fund manager preferences. This showed 64% of fund managers polled were underweight on SA, up from 29% in the January survey.
This year, government's net loan debt is expected to decline to R456bn from R477bn, and is estimated at R438bn in 2010/2011.
Government's net loan debt as a percentage of GDP is also falling steadily. It's down from 33% in 2004/2005 to an estimated 22,3% this year, and is forecast at 15,9% in 2010/2011.
There are no plans to issue any new government domestic funding instruments over the next three years, but it will extend existing programmes to support the fixed interest market - that will be about R5bn, net of redemptions.
Government intends to remain in the foreign debt market, but has no plans to issue any new foreign capital market loans to finance the medium-term borrowing requirement. Foreign debt in 2007/2008 is estimated at R78,4bn, or 3,8% of GDP.
Of a total gross borrowing requirement of R67,9bn over the medium-term expenditure framework, only R3,6bn will be borrowed in international markets.
Growth in borrowing by public-sector entities (or parastatals) will be much more significant.
The budget shows these have capital investment programmes over the next five years totalling almost R500bn, of which Eskom accounts for R343bn and Transnet R78bn. Though government says it will provide R60bn in funding for Eskom, much of the balance will need to be drawn from domestic and foreign bond markets.
